Topic 9 - Non-Current Assets Flashcards
What is PPE?
physical assets used in the business to provide future economic benefits for a number of years.
What does AASB 116/IAS 16 say regarding PPE?
economic benefits derived from the use of an asset must be recognised on a systematic basis over the asset’s useful life.
This decline is recognised as depreciation expense in the Statement of Profit or Loss.
What are the two classes of PPE assets?
- Property:
includes land and buildings. - Plant and Equipment:
includes computers, office furniture, cash registers, factory machinery, motor vehicles.
How are PPE assets initially recorded?
at cost in accordance with AASB 116, para 6 as: The amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire the asset.
What is fair value?
The amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s-length transaction.
What is the cost of an asset?
- Consists of the fair value of all expenditure necessary to acquire the asset and make it ready for use:
e. g. purchase price, freight costs paid, installation costs (capital expenses).
Excludes non-capital expenditures which are expensed immediately.
What does the cost of property (land) include?
- purchase price
- settlement costs (e.g. solicitor’s fees)
- stamp duty
- accrued property taxes assumed by purchaser.
What does the cost of plant and equipment include?
- purchase price
- freight charges
- insurance during transit
- installation costs.
What is depreciation?
The process of allocating to expense the cost of a PPE asset over its useful (service) life in a rational and systematic manner.
What is the carrying amount (written down value/book value)?
Cost less accumulated depreciation.
What are the four factors that contribute to the decline in value of a depreciable asset?
- Usage of the asset.
- Wear and tear through physical use of the asset.
- Technical and commercial obsolescence.
- Legal life.
What are the factors in calculating depreciation?
- Cost: all expenditures necessary to acquire the asset and make it ready for intended use.
- Useful life: estimate of the expected life based on intended use, need for repair, vulnerability to obsolescence and legal life.
- Residual value: estimate of the asset’s value at the end of its useful life.
- Date of Purchase: if the asset is purchased during a financial year, depreciation is pro-rated (based on the number of days from the date the asset was acquired to the end of the financial year). For BSB110, a calculation with the number of months divided by 12 will suffice.*
What are the depreciation methods?
- Straight Line
- Diminishing Balance
- Units of Production
What is straight line?
Spreads cost of asset evenly over life.
What is diminishing balance?
An accelerated depreciation method where more depreciation is allocated to earlier years of asset’s life and less to later years of asset’s life.
What is units of production?
Applies cost to how much asset is used each year (where possible to track this data).
How is straight line calculated?
Depreciation expense same each year as benefits are consumed at same rate each year.
Calculation for annual charge:
= cost of asset – residual value (depreciable amount) divided by useful life of the asset
or
= (cost – residual value) x (1 / useful life of the asset)
How is diminishing balance calculated?
Yr 1 onwards: Carrying cost x DB rate
Final year: Carrying cost - Residual value
How is units of production calculated?
Useful life is expressed in terms of total units of production or use expected from the asset.
Calculation of depreciation cost per unit:
= depreciable cost of asset (cost – residual value) divided by useful life of the asset
Depreciation expense calculation:
= depreciation cost per unit x yearly units of production
What are the two types of subsequent expenditure on PPE?
During the useful life of an asset, a firm may incur costs for:
- Ordinary repairs:
Expenses in maintaining operating efficiency of the asset.
Expensed in Statement of Profit or Loss. - Additions and improvements:
Costs incurred to increase operating efficiency
Expenditure capitalised (added to the asset) and depreciated over asset’s remaining useful life.
What are intangible assets?
Non-monetary assets that have no physical substance.
Examples include:
Patents (e.g. Apple iPod)
Franchises (e.g. Domino’s Pizza)
Trademarks (e.g. swoosh of Nike).
What are the two categories of intangible assets?
- Unidentifiable:
Cannot be separated from the entity itself.
Collectively referred to as goodwill. - Identifiable:
Must be capable of being separated or divided from an entity (whether sold, licensed, rented or exchanged) or must arise from contractual or other legal rights.
When is goodwill recognised?
Goodwill is permitted to be recognised for accounting purposes only when it has been externally acquired and not when it has been internally generated
When is an intangible asset identifiable?
A specific value can be placed on each individual asset, and they can be separately identified and sold.
For example, brand names, trademarks, research and development, patents, licences, mastheads and copyrights
May be internally generated (developed within the organisation) OR acquired for a cost (from an external party).
